CNNI - MME Blog

A sea of cranes

noreply@blogger.com (CNN's John Defterios) — Thu, 08 May 2008 15:11:00 +0000

I stepped out onto the terrace of my hotel this week in Dubai on Jumeirah Beach to take in the landscape. To my right in the distance stood the Burj Al Arab, the iconic sail-shaped hotel. In front of me, the Palm Jumeirah, the giant mixed palm-shaped resort and villa complex. I attempted to count the cranes in front of me on the Palm and stopped at 50. If I hazard a guess, I would say there are three times that amount. Below the sound of the Ibiza bar music on the terrace, I can hear the rumbling of buildings being constructed, steel rods being delivered, concrete being poured.

This is the beat of Dubai, of double digit growth and a property market that to date has not found a ceiling. Travellers to the Gulf know it is very difficult to find a hotel room these days. There are 35 thousand in Dubai today, going to 150 thousand by 2015. Neighboring Abu Dhabi has 10 thousand, going to 75 thousand by 2030. All this building is accepted without hesitation by globalists who sit poolside to take in some sun along with all the construction. Further afield on the terrace I see a table full of businessmen in sunglasses poring over their documents with refreshments in hand.

I was in Dubai this week for the Arabian Hotels and Investment Conference and in that role chaired interviews with Mohamed Ali Alabbar, Chairman of property developer Emaar, Paul Griffiths, CEO of Dubai Airports and U.A.E. Minister of Foreign Trade Shaikha Lubna al-Qasimi. Ali Alabbar has notched up $65 billion of property projects in 17 countries, Griffiths is overseeing the expansion of Dubai International Airport and then moving on to build the largest airport in the world and Shaikha Lubna is busy serving as the ambassador not only for trade, but articulating the merits of openness in the U.A.E.

Stringing together their comments from those interviews, it is abundantly clear -- using an automobile analogy here -- that the pedal remains down to the floor. The sea of cranes will be more populated and the 150 different nationalities that now live in the Emirates will remain in the Gulf in search of riches. In historical terms, it reminds me of the California Gold Rush which started in 1848. While that lasted for seven years, no one is willing just yet to call an end to this boom. There is too much money being made and yes plenty of capital available within the region itself for expansion.

My visit coincided with yet another record for oil prices this week. Based on a conservative calculation, the six Gulf States will bring in more than $400 billion dollars this year from oil. They are always searching for new ways to deploy that money and they don’t have to look far to find investors from a Middle East market of more than 300 million people.

With that heady backdrop of growth, I spent time asking these players and others if there are any landmines waiting that may bring this growth spiral down to more reasonable levels. This is the first time after many visits that developers and investors talk of a potential correction. In traditional terms, that could be a fall of 10 to 20 percent. It is also the first time that many of them privately said it would be a healthy occurrence. Investment as they all know from experience is not a one way path that always points north.

Mohammed Ali Alabbar would not be drawn into my question if we are 50, 75, 85 or 95 percent through the development of Dubai. He calmly responded that was in the hands of His Highness Sheikh Mohammed Bin Rashid Al Maktoum, the Ruler of Dubai and Vice President of the U.A.E. In sum he noted, we move on opportunity if it is prudent and it makes money for his now listed company. After a decade of business, Emaar has generated annual sales of more than $10 billion and turned a profit of $1.6 billion. That certainly is not bad for a former civil servant in Dubai.

The handful of major players who are implementing the master plans for Dubai and Abu Dhabi are attempting to keep their feet on the ground. For example, Griffiths of Dubai Airports said you won’t see a great big bang rollout for the new Terminal 3 in late August, à la Terminal 5 in London. That would not be prudent and only opens 'Brand Dubai' up to problems if all does not roll out as exactly planned. BAA could have learned a bit from this approach.

The numbers tell a less than measured story. Research out this week from Proleads tracked a total of $2.8 trillion in development projects in the Middle East, about of third of that in the U.A.E. alone. Demand for plants, personnel and equipment are growing at 20 percent a year. The 'sea of cranes' will not fade into the sunset just yet, but don’t be surprised if a storm blows through town to take some of the steam out of this fast-moving locomotive of growth.

Pressure to Move

noreply@blogger.com (CNN's John Defterios) — Thu, 01 May 2008 17:08:00 +0000

The U.S. Federal Reserve moved for the seventh time in the past six months taking interest rates down to two percent in the United States this week. The central bank, as is customary, put out a statement with the action underlining that financial markets remain under “considerable stress”, credit conditions “tight” and the housing market contraction still underway.

Ben Bernanke and his team at the Fed hope this will be the last of the cuts and that the worst of the credit crisis has past -- don’t be too certain about that. This is what concerns central bank counterparts in the Middle East, especially those in the Gulf States.

Watching with anxiety what is transpiring in the U.S. economy and to a lesser extent what has crossed the Atlantic to Britain, Gulf Cooperation Countries, minus Kuwait, have to follow suit due to their dollar pegs. They did and they too hope the storm front has passed – again don’t be too certain about that as well.

The problem, as we have talked about in this column, is quite different in the Gulf and it became more difficult this week in the region’s largest economy, Saudi Arabia. Inflation in the Kingdom hit a near 30 year high of 9.6 percent. The cost of rents, fuel and water surged 15.8 percent in March; other day-to-day staples saw double digit gains as well. Rents went up nearly 17 percent at the start of the year.

The United Arab Emirates, which is traditionally slow in releasing these figures, officially is seeing an inflation rate of 9.3 percent, but that goes back a half year. Other fast-growing, energy rich states are facing similar challenges. The real issue is what to do about it.

Finding an answer is not easy. For one, interest rates should be going up, not down. Number two, wages cannot keep pace with inflation, but leaders like Hosni Mubarak of Egypt know when the heat is on. He took what was an already high pay increase for civil servants of 15 percent and doubled it. The region’s most populous country is running a near double digit budget deficit, so he actions won’t be welcomed by foreign investors nor the finance ministry for that matter. And to round out the list, money supply will continue to surge as OPEC export related earnings this year surge past the $1 trillion mark.

Fuelling the Titanic

The real challenge with inflation, as central bankers and economists know, is that when it accelerates it is very difficult to slow it down. For purposes of an easy analogy, this is not a nimble racing boat, but a high speed Titanic. The real danger at hand is the threat inflation poses for the economic development cycle now underway in the Middle East. On our program we often talk about an Arab Renaissance, that growth this year, despite the downturn in the G8 countries should still be above 6 percent. That is true, but it won’t mean much if that growth is eaten away by skyrocketing prices.

The other issue is keeping workers in all those “castles in the sand” being constructed. The number is staggering; $3 trillion is either at work already or on the drawing boards. It will be very difficult to sustain those mega-projects if one cannot attract builders and very importantly laborers to get through the summer heat so they can send monies home to India, Bangladesh, Sri Lanka or Vietnam.

For Dubai and its second wave of development this, of course, will need to be addressed. But I am thinking more about Saudi Arabia in which one of the seven economic cities currently gathering momentum. The other six hold the key to the Kingdom’s future for the next generation to come.

Food for All

The region, minus the North African states, is overly dependent on imports, especially food. Gulf countries are paying for those imports with a weak dollar, which is down 35 percent against the euro in three years. The European Union is the number one market for those goods. This is where the loyalty to the dollar gets very pricey. Leaders from the United Nations and the World Bank held an emergency meeting in Switzerland this week and set up a food crisis task force aimed at helping the poorest countries deal with escalating prices.

It is hard to argue that countries seeing record oil revenues are suffering as badly as those say in Sub-Sahara Africa – that is certainly not the case – but rising prices are a real problem and will continue to be so.

$120 - a new and worrying number

noreply@blogger.com (CNN's John Defterios) — Fri, 25 Apr 2008 07:31:00 +0000

During the rush of the Pennsylvania primary, a $100 billion mortgage bailout in London and the global wake up call of higher food prices, oil prices quietly nudged up against a new threshold of $120 a barrel.

The unlikely source for news this week came out of Rome, one of the world’s most beautiful cities and a place I fortunately called home for four years. This week producing and consuming nation representatives gathered for the International Energy Forum, where they debated what future demand may be during a period of economic slowdown.

The 13 members of OPEC, ranging from Indonesia in the east, Venezuela in the west and giant Saudi Arabia in between, provide about 30 million barrels of today’s daily demand of roughly 85 million barrels. Of the 13 countries, oil executives and analysts say only Saudi Arabia has the excess capacity to meet the needs with China and India still growing at 8 percent or more.

However, if one reads between the lines of the comments coming out of the eternal city this week, there has not been a rush by the Kingdom or other players from OPEC to invest in developing excess capacity. If you can be paid nearly $120 a barrel for your existing production or $80 if you put more oil on the market, what would you choose?

Saudi Arabia is producing roughly 9 million barrels a day. At $120 dollars, it will make over $1 billion dollars a day; at $80 dollars subtract roughly about 30 percent of that. That, as they say in the U.S., is some serious money. Knowing that simple math, G8 consuming nations have increased the calls for more production to the market. It is not as easy as basically opening the taps a bit more.

Qatar’s Prime Minister Sheikh Hamad bin Jassim bin Jabr al-Thani who was a guest on Marketplace Middle East recently, put today’s excess capacity within the cartel at 300,000 to 500,000 barrels a day. That provides some cushion, but will not reverse the rise in prices over the past two years, for two key reasons.

While in Dubai I had a chance to talk to Martin Lovegrove Vice Chairman of Oil & Gas at Standard Chartered bank about the ingredients of the recent surge. Lovegrove broke down current demand in the market for oil overall. He reckons that $20 of the current price is a result of a 38 percent drop in the dollar since 2003. Another $20 is based on a surge of investment fund capital riding the wave of commodity prices. With equity and now real estate prices softening, the hot money has gone into, and will likely stay, in oil.

So $40 of the roughly $120 we see today has nothing to do with supply and demand.

OPEC Secretary General Abdalla Salem el-Badri tried to assuage leaders this week in Rome when he confidently stated that the cartel will be able to add another five million barrels a day to the market in the next five years.

While politicians are looking to calm consumer jitters, Badri did not seem to share their sense of urgency and said, “There are some problems, maybe a delay of a year or two … but it will come. I am not disturbed at all. I would like to assure the world that all the countries are investing.”

To do so, they are committing to spending $160 billion on infrastructure to expand production. That is about half of what Saudi Arabia takes in each year at today’s prices. The investment certainly won’t break their bank or others within the OPEC group of nations and as we now know from OPEC’s secretary general, will not erase the new target for oil traders of $120 dollars a barrel.

From Dubai to Doha

noreply@blogger.com (CNN's John Defterios) — Thu, 17 Apr 2008 10:37:00 +0000

We took our programme on the road again this week to explore Dubai’s next wave business strategy.

There is a rich history of trading in Dubai which stretches back to the 1850s. It is a mindset which is at the heart of the Emirate’s business plan for the next quarter century. Take DP World, the trading division of Dubai World. It has forged 23 different deals stretching from China to Djibouti. This allows Dubai Inc. to place a corporate flag in each country, planting the seeds for future relationships and growth. This sounds simple, but it may be the key differentiating factor for the United Arab Emirates vis-à-vis its competitors in the Gulf.

This week I had a chance to take an in-depth look at some of the building blocks for the future and to take in some high-level analysis from some of the top political and business leaders in the region at two forums -- the Doha Forum on Democracy, Development and Free Trade and Business Week’s Middle East-China Leadership Forum in Dubai.

Pieces of the Puzzle

Over the weekend, I sat in a few business plan briefings at three divisions of Tatweer, itself a division of Dubai Holdings, the key development vehicle of the government. Dubai Land, Dubai Healthcare City and Dubai Industrial City fit into the next stage of growth. To be candid, it was hard to appreciate the scale of these projects. You might have seen the brands on the many flags, which flutter in the Arabian winds, but to see where they fit into the puzzle of this economy is quite a different perspective. I could write a column on each of the projects, but simply put, one represents sizable theme parks and residential real estate; another is a new approach to integrated healthcare which is sorely needed and the final piece an industrial hub to support the growth which is underway. The hotel, residential and retail hub Bawadi according to its Executive Chairman Saeed Al Muntafiq is worth $53 billion alone.

The industrial city is under construction; 55 square kilometres of real estate which has logistics facilities, land available for global and regional manufacturers to lease space and even low income housing for laborers. This is to address one of the thorniest issues facing the governments in the region; that is to take care of the thousands of workers, primarily from South Asia who have been imported into the U.A.E.

If you take a step back, one can see the industrial logic of all the blueprints and buildings to come. Hotels, golf courses and villas are built to attract visitors and residents. The largest airport in the world is being constructed to bring tourists in and the industrial city will be there to support light industry which has expanded to accommodate the growth. The division managers of these projects smile when asked about the original feasibility studies presented by consultants for all these projects. They were rejected, I am told, by the Ruler of Dubai and now Prime Minister of the United Arab Emirates. It is obvious after this week in the region that the bar is set very high.

Dubai seems to be sprinting to stay ahead of its Gulf neighbors who are now constructing their own visions of the future. On the final approach after a 40 minute flight to Doha from Dubai, one can witness how Qataris plan to expand to more than a million people. The Pearl is the giant project on the cards. Like Dubai, Qatar realizes that trained workers and graduates will be needed to fill the buildings and map out the strategies for the future. The first graduates from the Qatar Foundation campus of four university programs with links to the West will commence May 6th. This is encouraging.

New Culture of Globalization

While the small but wealthy Gulf emirates expand, the sizable players of the Middle East are benefiting from what Turkish Prime Minister, Recep Erdogan called “the new culture of globalization.” Since coming to power in 2003, foreign direct investment has surged from $1 billion to $22 billion. Turkey has not only a large population, but is able to look East and West as an export hub for Europe and the Middle East. Egypt is enjoying similar growth in FDI. This is the benefit of greater integration.

U.A.E. officials say they mapped out their blueprints not on the 40 million people of the Gulf, but the 310 million people of the Greater Middle East Free Trade Area or GAFTA. They have tapped into years of pent up demand, especially after many residents repatriated their savings and assets after 9/11. While consultants may want to be conservative with their project studies presented to their clients in the Gulf, the leaders in the region have no plans to heed that advice.

With oil at $110 or more per barrel, it is full steam ahead.

Food Inflation: From Chronic to Acute

noreply@blogger.com (CNN's John Defterios) — Thu, 10 Apr 2008 17:18:00 +0000

The scenes seem to be from a different era; men and women scramble for what little bread there is left to buy. President Hosni Mubarak of Egypt orders bakeries from the police and the military to go into overdrive to provide whatever supplies they can.

President Mubarak, a man in power for 27 years, knows the link between ample food and a stable population. The problem for him and other leaders of the Middle East right now is that there is precious little they can do about it. Prices are surging for bread and a whole basket of vital commodities such as sugar, rice and cooking oil. It seems ironic that a region, Egypt included, awash with oil and/or natural gas is having problems with the basic staples of life.

The Middle East is certainly not alone. It is a fair point to say that the rise in food prices has moved from the chronic to acute stage. The challenge certainly is that the burden falls on the people who can least afford it.

According to the United Nation’s Food and Agriculture Organization (FAO), food prices have risen by 45 percent in the last nine months alone. That is serious. Jordan’s inflation rate surged nine percent in the last month. Syria saw their food prices climb 20 percent in the past half year. The list goes on and on. The FAO’s director-general Jacques Diouf said “unrest will spread” where half or more of income is spent on foodstuffs alone. Most of Africa falls into that category and so do many parts of the Middle East where poverty levels are still too high.

Ahead of the International Monetary Fund/World Bank meetings in Washington, British Prime Minister Gordon Brown wrote to the current head of the G8, Yasuo Fukuda, his counterpart in Japan. Brown said “rising food prices threaten to roll back progress made” on reducing poverty and fostering development.

A Perfect Storm

What we are witnessing today is a confluence of many factors hitting at the same time:

1. Global demand remains high despite a predicted slowdown in G8 economies

2. The rush to bio-fuels has created an artificial shortage for a basket of grains

3. Hedge fund investors have piled money into commodities, driving prices up even further

As a result, the World Bank candidly admitted that the situation, despite the threat of recession, will remain bleak through 2009. Worst yet, they are predicting that food prices will not come down to pre-2000 levels until 2015. Obviously, like the Titanic, it is not easy to steer agricultural policies that really miscalculated the economic surge of the Middle East, plus Brazil, Russia, India and China (the so-called BRIC countries.)

Complicating matters for the Middle East, last weekend Gulf leaders restated their loyalty to the U.S. dollar and that they will not de-peg their currencies.

As Daniel Hanna a visiting fellow at the Royal Institute of International Affairs said: “When you've got a situation of the dollar being at historical lows against the yen, against the Chinese currencies, against the European currencies, that has a knock-on impact onto the region as a whole. That kind of double-whammy effect has really pushed up sort of day-to-day prices across the whole of the region.”

So look for more proclamations against the rise in prices from many corners of the globe as leaders gather in Washington, but don’t be lulled into believing they will have any real solutions.

The East-East Economic Axis

noreply@blogger.com (CNN's John Defterios) — Thu, 03 Apr 2008 15:02:00 +0000

Even in China, a country of more than a billion people, it would have been difficult to miss the Ruler of Dubai and Prime Minister of the United Arab Emirates and his delegation representing five and a half million people.

H.H Sheikh Mohammed Bin Rashid Al Maktoum brought an entourage of 50 business leaders and throngs of government support to advance trade between the two economies which are both expanding around 10 percent a year.

While a great deal of this was largely for the cameras, with President Hu Jintao for example handing over the official invitation in a Beijing ceremony, there is a lot to be said about the emerging axis between the Middle East and China. There was hope and early talk of $2 billion dollars worth of deals to be announced on this trip. Nothing really materialized beyond a research agreement between regional mobile operator Etilisat and Huwaei Technologies of China.

Merchandise trade however between China and the U.A.E. has been growing 30 percent or more each year for the last four years. Dubai is home to one of the largest retail and wholesale centers in the world, the Dragon Mart, and Chinese companies are busy constructing buildings across the region. These are the headline numbers, but what may be more fascinating is what could be on the way.

The Chairman of Dubai World, Sultan Ahmad bin Sulayem talks of the “excellent” bi-lateral relations and his group has placed investments on port projects in Qingdao and Shanghai. Unlike the P&O deal in the U.S. which created a fuss in Washington, there was no resistance to the capital investment from the Gulf into China.

During an interview this week on Marketplace Middle East, the former Prime Minister of Pakistan, Shaukat Aziz, underscored the point saying there are no competing interests. The Gulf needs Chinese goods, capital and construction groups. China wants access to a potential market of 430 million people in the Middle East and North Africa region and open access to their oil and natural gas reserves. After a landmark visit to Beijing in January 2006, King Abdullah of Saudi Arabia signed a deal to set up a refinery for the Kingdom’s oil on Chinese soil.

While energy security may represent the lion’s share of Chinese foreign policy and its investment decision making (look at Africa for inspiration), it is re-drawing the map of the Silk Route which is literally being re-built from the Middle East to Far East Asia. Good business deals, lead to good relations and open markets for goods and capital. With Washington and Brussels jittery over the Chinese trade surplus and the inability to compete on a low cost basis in certain sectors, Beijing wants to hedge its bets.

Sovereign Power-Play

Beyond trade links, there is a less obvious common ground that China and the U.A.E. share these days, investments by their sovereign wealth funds. While the transatlantic rhetoric has calmed down over the past month, the two countries have been at the forefront of the more high profile stakes in U.S. banks and retail brands such as Barney’s. Dubai International Capital, Istithmar, Dubai World and China Investment Corporation (CIC) are names we are familiar with after the global spending spree that heated up last autumn.

While Sheikh Mohammad was busy exploring b-lateral investments, a key executive at CIC sounded more “Gulf like” when he said “we are facing rising protectionism and nationalism”. After seeing his stakes in Citigroup and Blackstone suffer, CIC has publicly stated it is looking for conservative returns for their $200 billion fund.

Expect more discussions on this front and some unusual partnerships. Overlooked in analysis over a U.S. economic slowdown was a discreet meeting in Washington recently. It was a different type of Asia-Middle East partnership; this time Singapore and Abu Dhabi.

Representatives from sovereign funds GIC and the Abu Dhabi Investment Authority met with U.S. Treasury Secretary Henry Paulson and Deputy Treasury Secretary Robert Kimmitt and agreed on the principles that will govern best practices for investments. This process will wind its way through organizations like the International Monetary Fund and the O.E.C.D., the Paris based think tank for industrialized countries.

While that gathering did not capture the headlines of Sheikh Mohammad’s delegation, it is another example of the new East-East economic axis and the deals and partnerships that are set to emerge along with these markets.

No 'lid' in sight

noreply@blogger.com (CNN's John Defterios) — Thu, 27 Mar 2008 14:24:00 +0000

In this column and on our program we are busy exploring the efforts by Middle Eastern governments and businessmen to build a sustainable model for economic growth. It has been quite fashionable to talk about building the “software” or the people skills to leverage the “hardware” that is being constructed throughout the region.

Unfortunately, as governments are finding out now, it is not so easy. I have an image of my children erecting a Lego set in their playroom. They put the pieces together, somewhat unevenly, with many different colors. If they don’t like what was pieced together, they simply tear it down and start all over again. The leaders in this hyper belt of economic growth are realizing that on the front lines that it is not that simple.

When one looks at the headlines, Qatar’s economic growth looks impressive on its own. In five short years, the economy has expanded from a gross domestic product of $16 billion to $60 billion today. And that is not the end of it. Expect more of the same as construction begins to rev up. The problem is, the Emirate is also facing the fastest growing rate of inflation in the region -- as high as 14 percent.

During an interview this week Daniel Hanna, a visiting fellow at Chatham House (home of the Royal Institute of International Affairs) in London, outlined the challenges. We often talk about the impact of the dollar peg on the Gulf countries. With the dollar hitting new lows, the cost of imports to the region is surging. In five years, imports have gone from $150 billion to $370 billion, as they pay for goods from Europe, Japan and other non-dollar denominated economies.

Secondly, Gulf central bankers have lowered interest rates in lock step with the U.S. Federal Reserve to match economic policies due to the dollar link. The problem is, the U.S. is slowing down and the Gulf is surging. The lower rates are leading to a liquidity boom -- too much money chasing too few goods -- leading to record inflation.

In central bank parlance, policymakers talk about “calibrating” economies to keep growth moving forward, while keeping a lid on prices. This is not the time for calibration in the region. Outside of revaluing their currencies against the dollar or moving to a basket of currencies to buffer the dollar’s fall these banks, according to Hanna, have not developed other tools to tackle modern day challenges. With the exception to Saudi Arabia, these countries don’t issue short term bonds, for example, to absorb the flood of money on the market today.

This all sounds esoteric -- if you will -- but don’t say that to the flood of expatriate workers from India, Pakistan or Bangladesh who have seen their buying power eroded. In Egypt, civil servants have joined the ranks of protestors seeking pay rises to combat a 50 percent surge in prices for staples over the past year. Egyptian President Hosni Mubarak sent orders to the army and police to use their bakeries to supply bread to the market. We have witnessed long queues with people scrambling for basics.

The pressure will mount in the months ahead and governments will use short term measures to cope. Egypt for example is paying an extra $3 billion this year to subsidize bread, rice, cooking oil and petrol for cars. If you are awash with cash like Saudi Arabia that may be okay, if you are trying to create sustained growth like Jordan, Algeria and Egypt it is more challenging.

The problem, as Hanna notes, is that “you may be storing up problems for the future”. While $100 plus oil is lifting the boat for all at this moment in time, if the global economic slowdown reaches the Middle East, governments will have to deal with much more than just inflation.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below.

A Universe Apart

noreply@blogger.com (CNN's John Defterios) — Thu, 20 Mar 2008 14:45:00 +0000

The Great Eastern Hotel near Liverpool Street train station was designed with the City of London financier in mind. Its minimalist interior, clean lines and discrete atmosphere create the right setting for business people to work on a deal or attend a mid-sized forum.

I escaped into the Great Eastern this week for a few hours at a gathering of Egyptian ministers and business people to discuss the outlook for the region’s most populated country. The talk inside the meeting room was about robust growth of 7 percent, foreign direct investment hitting a record $11 billion dollars and re-positioning Egypt to capture more than its fair share of Gulf petrol dollars.

On the way over to the meeting, I read my morning paper with headlines reacting to the Federal Reserve’s orchestrated bailout of Bear Sterns and yet another drastic cut in U.S. interest rates to help cushion the blow of the slowdown. This was followed by rampant rumors in London of an imminent collapse of a leading retail bank. The rumors sparked an investigation.

Inside the foyer I took time for a few interviews to sound out my views that we are not living in one global economy right now. “It really does seem like two parallel universes,” said Marwan Elaraby of Citadel Capital the Egyptian investment bank.

“You drive around Dubai or the more frontier emerging economies of the region, you would never guess what is happening in the world economy. What is happening on Wall Street or the City of London seems like a universe away,” added Elaraby.

The dollar continues to tumble; oil continues to surge; prices everywhere for staples are skyrocketing. Despite the rosier economic outlook, protestors in Cairo demanded that President Hosni Mubarak do something about the cost of bread. History buffs know from Roman times that economic growth alone does not deliver votes, but affordable access to bread certainly does.

Finance is Confidence

Middle Eastern players are not ignoring the red-lights of concern flashing on Wall Street, quite to the contrary. They are hoping to minimize the impact. As co-founder of Beltone Financial, Aly El-Tahry noted: “Finance is confidence. As long as you don’t have a catalyst or something that diverts the present expectation from this negative mood, we’ll continue to have uncertainty.”

For Egypt that may translate into a drop of up to 1 percentage point of growth this year according to the country’s Investment Minister Mahmoud Mohieldin. While he acknowledged the challenge, the 42-year-old minister added some bigger picture thoughts on what this might eventually mean.

“I'm much more concerned about the policy formulations in the future because the kind of extreme pragmatism that we're witnessing today could be justified in the short term by uncertainty, by requirements of having to make and to do some quick actions to fix problems,” said Mohieldin. The Worldcom fiasco led to Sarbanes-Oxley. This severe credit crunch he worries may lead a new White House occupant to move into action to limit trade or the flow of financial investments.

Let’s hope not. We however have heard very little from the three remaining presidential candidates on what they would do about the Doha trade round, sovereign wealth funds or the sinking dollar.

Meanwhile, back in the foyer of the Great Eastern, the talk remains on creating new opportunities. Egypt is in the midst of creating a new industrial investment hubs and expanding IT centers. For that to come off the minsters know that skills need to match the demands of companies such as Microsoft or Oracle who already have a presence there.

With this economic boom underway in the region, the players are looking to India and China for inspiration, not Wall Street or the City of London.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below.

The well's running dry

noreply@blogger.com (CNN's John Defterios) — Thu, 13 Mar 2008 13:28:00 +0000

In a week where oil and gold have found record highs, it seems almost out of place to discuss the emergence of another commodity that will likely determine the viability of the Middle East and North Africa region – water.

Water, like electricity in one’s home, is taken for granted. When was the last time you thought about the source of your water, the price of water or whether it will be there when you open the tap?

About a third of the world’s population does so each and every day, because they don’t have reliable access to clean water. While it is not a desperate situation today in the Middle East, it will be tomorrow if the situation is not tackled.

The global population is expected to expand by two and half billion in 2050. Besides the obvious natural pressures of living in the desert sands, the region is also home to the fastest rate of population growth, where it is tabbed to double to 600 million by just 2020. The Middle East only receives about two percent of the world’s rainfall and has only one percent of its water resources.

This has not been lost on policymakers and the ruling families. Six of the top ten investors in desalination plants are Middle Eastern governments, totaling 57 percent of global capacity. Many of those facilities need to be upgraded and new ones need to come on line to keep pace with both economic and population growth.

There is a handsome payoff for this investment. According to Gulf One Investment Bank in Jeddah, for every dollar put into water capacity, there is a three dollar boost in productivity. This means that water is not only the source of life, but the source for future growth as well. To date Saudi Arabia has allocated about three percent of its annual budget to water infrastructure; investors say ten times that amount is needed. The Kingdom is the largest owner of desalination facilities and with the seven economic cities planned for the next two decades, demand will surge, so will the need for the private sector to play a role. Rough estimates put the sums needed at $100 billion for the region in the next eight years.

With those dollar signs flashing, investment bankers are busy working on the formation of funds to leverage the opportunity. Gulf One recently launched its Moya Holding Company. The first tranche of the two billion dollar fund has been raised and they are co-investing that money with governments in public-private partnerships. Expect many more of the same models. I recently interviewed Atif Abdulmalik the CEO of Arcapita, the Bahrain-based private equity group who says bluntly, “We as an institution are focusing on it, investing in it because we think that's the future.” The group has quietly bought water utilities in Europe and the United States and sees water as one of the most promising sectors in the region as well. As one shrewd Malaysian CEO Francis Yeoh of YTL Corporation wisely shared over dinner five years ago, utilities may not be sexy, but they are predictable and produce cash flow. That is why he too is a buyer of utility companies in Britain and Australia.

Peter Brabeck-Lemathe of food giant Nestle has put the issue of water at the center of his radar screen. He finds politics at this juncture have overruled common sense. Two-thirds of the world’s water supplies are going into agriculture, but how efficiently? Bio-fuels are not water friendly by any means, but the rush into production has been intense.

We know through our coverage that the Middle East is swimming in record oil revenues. There is so much around that sovereign wealth funds are investing that money at home and abroad. This is a case where oil and water do mix. All the mega development projects being built in the Gulf and throughout the MENA region from Algeria to Yemen will not mean anything without the free flow of water.

This will require a combination of proper infrastructure, new technologies and the collective efforts of business and government. Let the conservation and the exploration begin.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below.

Damaging dollar

noreply@blogger.com (CNN's John Defterios) — Thu, 06 Mar 2008 15:20:00 +0000

There are many policymakers in the current White House who’ve silently supported a weaker dollar policy for the second term of the Bush Administration. This, the argument goes, helps support U.S. exports. True, but the downside risks today are percolating on many fronts. One can make a solid case that the common thread, which weaves through the financial markets today, is the weak dollar.

President George W. Bush was quick to criticize the 13 members of OPEC this week for not increasing oil output at their meeting in Vienna. That may be politically palatable but it seems to be short on economic realities. There is at most, as numerous leaders and analysts have outlined on our program, 500 thousand barrels of spare oil capacity within the cartel and that is not enough to drive prices down from their historic highs.

The culprit is the weak dollar. As a bet against dollar-based assets, global liquidity pools controlled by global fund managers have put money into the oil market. So the record prices we are seeing today are in part driven because these managers are looking for a more attractive return for their money.

A similar story is playing out with the hard commodities – gold, platinum, silver, iron ore. The $100 barrier for oil has been broken and gold appears to be on its way to the $1000 an ounce with its record run.

Don’t get me wrong; pressure from the developing world is intense. Countries within the broader Middle East are growing nicely and this is true from Dubai to Shanghai, from Kiev to Kuala Lumpur. As this band of growth from the Middle East to the Far East continues to expand, the pressure for the entire basket of commodities will continue to grow. But a strong dollar policy based on sound budget management in Washington would likely take out the top 20 percent of these record highs.

Keep tapping the wealth

There is a less obvious, sidebar story that has been a result of the soft dollar policy and that is the hunt for better returns by the giant and still growing sovereign wealth funds of the Gulf countries. When the dollar was solid, these funds were quite happy to park their money into the U.S. dollar and U.S. bonds. That is not the case anymore. With the coffers overflowing from $100 oil, they are re-deploying their assets around the globe, in U.S. and European equities, property deals and utility companies.

This had many crying foul, but the rhetoric this week toned down considerably. As European Commissioner Charlie McGreevy noted on our program, the debate changed a great deal in the last year. “From being looked upon as, I say 'pariahs' as it were, a year ago. I think people are now looking at it in a more balanced way and I think we've had a more balanced discussion now then we would have had one year ago.”

This is true in part because Europe and the U.S. actually need the funds as almost lenders of last resort. As a result, both the European Union and the U.S. Treasury are both talking about a voluntary code of conduct for sovereign wealth funds. The Gulf money managers I have spoken to scratch their heads and wonder out loud what that means in practice. But again, a whiff of cooperation seems to be in the air. The Chief Executive of Dubai International Capital Sameer Al Ansari said this week: “There’s little question that there needs to be more transparency.”

While a center ground is being found, the funds garnered a big vote of confidence from Warren Buffet who moved to the number one slot on the Forbes wealthiest people list. Buffet pointed the finger back to Washington: “This is our doing. Our trade equation guarantees massive foreign investment.”

As the Oracle of Omaha noted, the weak dollar may have helped sell goods abroad, but it has meant that, not only does the trade balance need to be financed, all the other products up for sale – especially banks and buildings – look like a bargain.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below.

Tales from a port city

noreply@blogger.com (CNN's John Defterios) — Thu, 28 Feb 2008 12:31:00 +0000

In a country that is not known for its openness, the port city of Jeddah provided a safe harbor for some frank discussion about the Kingdom’s future.

Regular visitors of Saudi Arabia know that Jeddah has for 1400 years served as a crossroads on the Silk Route. It has always been a merchant city where new ideas are brought into the agora and passed on.

This was in abundance at this week’s Jeddah Economic Forum, a meeting place for the past nine years and still able to bring in some heavyweight names. Capturing the most attention were the former Federal Reserve Chairman Alan Greenspan, Nobel Laureate Muhammad Yunus, and Saudi Labor Minister/ renowned author Ghazi Al-Gosaibi.

All three carried the show – the first sharing his insights on the pending recession in the United States. Greenspan said the U.S. economy was in “stall speed and the longer that goes on the greater the possibility of slipping into recession.” And the veteran of usually cautious phrases (trying to avoid the global limelight by restricting television cameras in an agreement with the organizers) said that de-pegging the Gulf currencies from the dollar would reduce pressure on inflation.

The idea was quickly rejected in the next speech by the Vice-Governor of the Saudi Arabian central bank Muhammed Al-Jasser. While he praised Greenspan for his wisdom and was a student of his works, he was bold enough to suggest that history has not proven his mentor in this case to be correct. It is a huge issue in the Gulf, with record oil prices also delivering record inflation.

It was the sort of candid give and take I was not expecting in Saudi Arabia. Time again, whether through questions from the floor on the panels I was chairing or through answers from electronic polling, participants were direct, probing and seeking solutions to the shortcomings they see in society.

Mind the Gap

What does this tell us about Saudi society today? With oil above $100 a barrel and revenues to Saudi Arabia alone predicted to top $200 billion dollars in 2008, the people want action and results. This is the biggest challenge. There is a huge gap right now between expectations and reality. Yes, Saudi Arabia plans to build seven new economic cities from scratch, with a budget of at least $100 billion. Twenty-eight billion dollars will be spent this year alone on primary and secondary schools. The aim is to develop human capital.

Skilled workers will be in demand in these new cities but they will need advanced degrees or, at the very minimum, quality technical training. The government was candid about the current problems. Both Saudi Royal Prince Turki Al-Faisal and Labor Minister Al-Gosaibi acknowledged that the reform process should have started 10 to 15 years ago. A big investment opportunity 30 years ago in Saudi Arabia was, many say, ill-conceived and now the new leader King Abdullah is acting like a man in a hurry. He should be.

Official unemployment of 12 percent downplays youth unemployment of more than double that. Fifty percent of the population is below the age of 20 and there are more on the way. They need jobs to avoid civil agitation.

The blueprint put forth by this government is ambitious -- probably the largest undertaken by a government since the rebuilding of Germany and Japan after World War II. But buildings alone, or the hardware, will be of little use if the people, the proper software, are not in place.

Perhaps this is why the participants at this year’s forum were yearning for simple solutions to their challenges, and why they afforded Nobel Laureate Yunus near rock-star status. He shared the work of Grameen Bank, lending without collateral for the poorest of the poor. It struck a chord with this audience who, despite record oil prices, feel they should have a wider swath of society enjoying the wealth. Yunus was swamped after his speech, surrounded by a pack of participants wanting to thank him for his inspiration to tackle poverty.

As I said, expectations are high in the Kingdom and the work has just begun.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below.

Trouble Brewing Beyond the Oil Fields

noreply@blogger.com (CNN's John Defterios) — Thu, 21 Feb 2008 08:09:00 +0000

It does not take much to rattle the commodity markets these days. Despite a dramatic slowdown in the United States and within Western Europe, there is certainly enough demand and enough speculation to have a new record close for oil this week above $100 dollars a barrel.

The trigger for the final close above that benchmark was a refinery explosion. Fingers were also pointed at the falling dollar, potential unrest in Nigeria and Hugo Chavez’s unpredictable nature as the overseer of Venezuelan crude.

With the strong growth underway in the Middle East region for this year and the mammoth construction boom, prices for everything from iron ore to make steel to Arabica coffee beans to make cappuccinos are at record highs.

There is a whole basket of so-called soft and hard commodities skyrocketing – and for good reason. Demand outside of the Group of Seven countries remains strong and minor “events” create reasons for speculators to drive prices higher.

Take Kenya and the prolonged negotiations over the power sharing talks with President Mwai Kibaki, and renewed fighting in Sri Lanka between the government and the Tamil Tigers in the north. Together those two countries represent 50 percent of tea exports. Tea demand is up 12 percent over the last year. Again, don’t look to the traditional tea houses in London for the answer, but places like India and China which cannot meet domestic demand.

Last week, prices for high quality Arabica coffee beans soared to a ten year high, after prices climbed 36 percent in 2007. Cocoa prices hit a 24 year high after surging 45 percent last year. Upcoming elections and civil unrest in the Ivory Coast provide plenty of “grist for the mill” (or reasons to speculate) if you are a trader of cocoa beans.
I don’t know if you are a daily scanner of the commodity section of your preferred newspaper, but right now they make for interesting reading beyond the daily staples of our diet. Platinum, iron ore and gold are all in record territory. We are seeing that major steelmakers are settling on contracts for raw supplies that are up more than 70 percent over last year. No doubt, the construction companies of the Middle East will be paying higher prices for steel plates and wire, only adding to the inflationary pressure we are seeing for real estate in the region.

The sum of all the parts is this: The rise across the board of this basket of commodities is not esoteric, “does not affect me” kind of stuff, but the real deal. While a slowdown in the West may slightly correct the imbalance of supply and demand near term, it will not solve the problem created by prosperity and a more globalized world. One thing I am not reading between the lines is the potential for the extra supplies coming onto the market to curb these prices. This applies to both quality coffee and quality crude.

Which leads me back to the recent rise of oil. Doing some quick math on Saudi Arabia, at roughly nine million barrels a day, the Kingdom brings in $6.3 billion a week in revenues from oil production; $325 billion a year. That is a great deal of money for a population of just 27 million. The government is in the midst of reallocating that money with a whole set of new economic cities, airports and universities. They don’t want to see a replay of the 1970s boom and bust scenario. There is an effort underway to build a foundation for future growth, beyond the barrel if you will.

We’ll take a closer look at that effort next week while on the ground for the Jeddah Economic Forum.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below.

Pillars of Strength, Pillars of Weakness

noreply@blogger.com (CNN's John Defterios) — Thu, 14 Feb 2008 13:03:00 +0000

This weekend my family and I will travel to Rome for a visit linked to a mid-term school break. My wife’s family lives around the corner from the Pantheon. The Temple of the Gods dates back to 125 A.D. It is arguably one of the most impressive structures in the world.

When one walks into the Temple, the characteristics of grandeur and strength stand out. The pillars supporting the Pantheon are rock-solid, conveying stability, history, permanence. One gets the opposite feeling about today’s U.S. economy.

It is hard not to turn on the television, open a financial website or a leading newspaper without finding a banner or headline discussing the prolonged recession which may be awaiting America. While it may dominate the news, there is a tendency to use broad strokes to describe what is underway and what impact it will have outside the U.S.

Let’s tackle the first issue. Not every sector is experiencing a drop in demand. While sixteen pillars support the façade and portico of the Pantheon, two key pillars are showing signs of serious erosion in the U.S.: the housing sector and the banking sector. The White House signed into law a $170 billion stimulus package, which is designed to send a signal to both Wall Street and Main Street that Washington is responding to the challenge. As President George W. Bush declared, the U.S. can “absorb such shocks and emerge even stronger.” That is true and I witnessed that first hand in California during the 1990-91 recession. This is a case where having only 200 plus years of history versus 2000 years are a benefit. The economy takes a hit, sectors regroup and businesses move forward.

Right now we are in the evaluation phase. There is still talk within financial circles that the developing world can de-couple from the U.S. and grow strongly despite the turbulence elsewhere. The head of the International Monetary Fund, Dominique Strauss-Kahn poured cold water on that concept this week while in India, calling the theory a “very misleading idea.”

Hold on a second. The IMF cut its forecast for global growth from 4.4 percent this year to 4.1 percent. That is sizable but not catastrophic. Last year’s pace of 4.9 percent was not sustainable. Export-dependent China will slow to 9.6 percent, hardly a panic. Even in London, the Bank of England is balancing interest rate cuts against the threat of higher inflation. Investors are moaning about house price inflation rising only four percent this year; that is not a fall of 10 to 20 percent that we are witnessing in some American cities.

This is where the Middle East comes in. Enemy number one right now is inflation. You see it in wages, housing, clothing and food. It will likely lead to a de-coupling of the five remaining Gulf currencies from the dollar. But during my constant visits to the region, no one is talking about recession. Look at the price of oil. If there was a real global recession, I would expect a $20 drop in crude, not the $2 we have seen over the past month. We can comfortably expect the region to produce growth of six percent in 2008. Not bad and one would say “de-coupled” from the U.S.

What I think we are witnessing right now is not a crisis of growth but a crisis in leadership. During the recent World Economic Forum, I chaired the 2008 Economic Brainstorming Session, featuring a handful of leading economists, a handful of leading CEOs and a handful of finance ministers from the developing world.

In an electronic poll which followed a good 90 minute debate, two items led the survey of the greatest concerns. Over 18 percent signalled a lack of coordinated response and leadership to the current economic crisis as the biggest threat today. Another 18 percent pointed to mismanagement of the crisis, i.e. incorrect decision making. That is pretty alarming. In a globalized world where we are more dependent than ever on each other, those on the frontline don’t believe government and central bankers will deliver the right medicine.

In fairness, the world is more complex than ever. It means central bankers and leaders in the Middle East have to respond quickly to the challenges in front of them and not through the rear view mirror. The dependence on the dollar and skyrocketing real estate prices are good places to start. Initiatives have been put forward and acted upon. More are probably around the corner.
But as the Romans convey through their ever-lasting structures, let’s not overreact to the headlines. While two pillars of weakness are cause for concern, they are not yet a cause for alarm.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below.

21st Century Pyramids

noreply@blogger.com (CNN's John Defterios) — Thu, 07 Feb 2008 13:14:00 +0000

“Build it and they will come.” The mysterious voice that Kevin Costner heard in his 1989 movie Field of Dreams is fitting for one of Egypt’s prized projects, the Smart Village.

While Costner starred in the film which sees American players from the early 20th Century reappearing on a baseball diamond cleared from an Iowa cornfield, the Smart Village has a visual link to the ancient Pyramids only ten kilometres down the road in Cairo.

But instead of dreaming back 2000 years, the technology park is designed to take Egypt into the 21st Century. A half hour drive (if one is lucky) on the Cairo/Alexandria road leads you to mirrored glass pyramids, white walls and man-made lakes. It is home to some formidable international brands in technology – Microsoft, Canon, Hewlett Packard, Vodafone, Alcatel – and some local ones as well – Orascom, Xceed and Telecom Egypt.

During an interview in Davos on CNN Marketplace Middle East, Bill Gates talked about the ability to have technology help the Middle East region leap-frog against their more developed counterparts in Asia, Europe and the United States.

“Technology I think is very important now, whether it is to broaden the economies of these countries or just help them be more efficient in things they're doing”, said the co-founder of Microsoft. “Certainly if you look at the scale of investment there, making sure that the right software is done for banking, for tourism, for energy is important.”

Egyptian Prime Minister Ahmed Nazif is big believer in the power of technology and the architect behind the Smart Village when he was Minister of Communications and Information Technology (CIT). He likes the place so much that he still spends two days a week working on the outskirts of central Cairo, in part to stay in touch with business leaders and to enjoy the peace and tranquillity. It is the complete opposite of ancient Cairo, where economic growth of the last four years has only added to the legendary traffic and honking horns.

While there is a great deal of excitement about the oil and gas driven growth in the Gulf, Egypt and its neighbours in North Africa have tied together a string of solid numbers to date. Egypt for example, continues to grow at a pace of about seven percent with its foreign direct investment surging from $300 million dollars five years ago to over $11 billion dollars last year. The World Bank has recognised this cabinet’s work by awarding Egypt with the most improved reformer in its “Doing Business” survey, for its work in simplifying regulations and cutting red-tape.

Meanwhile, at the Minister of CIT, Nazif passed the baton to Tarek Kamel, his young protégé who, with blackberry in hand, is in a rush to build on the gains. There was so much demand for the industrial park, that he has introduced Phase 4 which will be the new home of financial services companies. Over a tea in his office this week, Kamel called the Village a "flagship of development of CIT in Egypt. It reflects the public-private partnership spirit; government and private sector have invested since five years."

His next big project will take place in Maadi, a location best known for its expatriate compound. Kamel sees a big future for business processing operations (BPOs) with a huge pool of educated, but often unemployed and under-employed youth. Think of Arabic, English and French call centers for European and Middle East banks and credit card companies and you get the concept.

That is all on the drawing board right now and I am sure it is not without frustrations and challenges. Now in the fourth year of reforms, the government is eager to have solid growth and foreign direct investment create more jobs and to reduce those still living in grinding poverty. One may not see them in suburbia, but they are impossible to miss when driving to an appointment in the city.

The cabinet knows that reforms have to be felt by those at the lower end of the earnings scale. The poverty level, those living on two dollars a day or less, remains stubbornly high and long serving members of this government know that political realities require more action.

“We are deeply concerned about those in Egyptian society that are not touched by the reform directly,” Youssef Boutros Ghali, Egypt’s Minister of Finance told Marketplace Middle East. “There are people below the poverty line reaching almost twenty percent. Like all developing countries, these reform programs will trickle down but they will not trickle down overnight. They will take time to reach those less privileged in our society.”

And that is what struck me this week during my visit. While we may cherish the history, grit and chaos of Cairo, one gets the sense that the legacy carries with it a heavy burden. The Gulf countries are building new cities off of blueprints in the sand, with much smaller populations, and with no ancient buildings and historical sites to build around.

With 80 million people (and growing fast) the challenge is a big one but so is the opportunity to utilise young Egyptians to build their own Field of Dreams.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below.

The Heat is on

noreply@blogger.com (CNN's John Defterios) — Thu, 31 Jan 2008 13:40:00 +0000

It is certainly not the first thing on the mind of Ben Bernanke and the board of governors at the U.S. Federal Reserve, but the second aggressive move within a span of eight days is putting the heat on his counterparts in the Gulf.

Five of six members of the Gulf Cooperation Council remain linked to the U.S. dollar through a historic pegging, designed to keep inflation at bay. We are seeing the first signs of cracks with that policy and realistically one may not see the peg lasting through 2008.

In an interview from Davos last week with “Marketplace Middle East” Qatar’s Prime Minister Sheikh Hamad bin Jassem Al Thani said, “We are studying all options at the moment”, adding, “Every country has to see its way out of this, but only after consultation with the GCC.”

You don’t even have to read between the lines to get the message that there is a sense of urgency. Inflation of 14 percent in Qatar threatens to undermine the economic master plan being pursued by the royal family. A visit to Doha in the past six months opened my eyes to what is quietly in store. Education, technology, energy and financial services hubs are underway – not at the breakneck pace of Dubai, but a measured response considering Qatar sits atop the largest gas field in the world and remains a key OPEC producer. While not in competition with the United Arab Emirates, Qatar and the UAE share common traits today: Fast growth and equally high inflation.

The March to 2010

Under ideal circumstances and without the interest rate pressure applied from the Federal Reserve, GCC members would ideally like to transfer their peg to the dollar to their own single currency. Time is not on their side. Sheikh Hamad was candid in his reply; “It (2010) is just a target. I don’t think we will reach that target.” This means that the economies in the region won’t converge as planned by then and they may grow their separate ways, until they can come together by, say, 2015.

Like the Euro introduction before it, a single Gulf currency will indeed help control inflation with a single, independent central bank and it will strip out a great deal of national protectionism still afforded some of the vast trading families. Also think of all the operating costs one can strip out with a single currency for investments and transactions?

That all seems like a long way off. In the meantime, there is a test underway -- a test of wills within the GCC whether to stay with or abandon the dollar link -- a test to the concept of de-coupling. Can the Middle East sustain its fast growth, infrastructure outlay and the ability to build intellectual capital to match the financial capital?

The answer to that question will likely come after the Federal Reserve finishes its aggressive attempts to stave off recession and what many still see as a potential global credit crunch.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below.

The new darlings of Davos

noreply@blogger.com (CNN's John Defterios) — Wed, 23 Jan 2008 14:49:00 +0000

Almost as heavy as the snowfall that greeted participants at this Swiss Alpine resort, was the cloud of anxiety hovering over the start of this year's World Economic Forum.

Stock markets around the globe were badly shaken by the potential spread of a credit crisis from the U.S. This was not lost on Middle Eastern markets which started selling-off Sunday, their first day of trading, and carried through Tuesday.

The dramatic, and what some saw as a panicked, reaction by the Federal Reserve, to cut interest rates by three-quarters of a percentage point sent mixed signals. What is the Fed seeing that others might not? Certainly the signal is that the bottom certainly has not been found on Wall Street, and for that matter some of the European banks as well.

That, however, does not mean the rest of the world should freeze in its tracks and that growth should come to a halt. The Middle East in fact is coming off some of the fastest growth in three decades. The excess liquidity of $400 billion each year from oil prices in the $80 per barrel range has changed the dynamics of the region and what these players are doing with their capital.

The International Monetary Fund estimates that $800 billion will be put into infrastructure in the region. Tall buildings, new financial centers, energy cities, new university hubs -- they are all being built. But the region can only absorb so much capital.

This is where the new darlings of Davos come in: The sovereign wealth funds. In case you missed it, the funds were the subject of front page articles on both Business Week and the Economist over the weekend. The danger from my vantage point here is that there is a lot of discussion about moving fast, taking advantage of buying opportunities (like Citigroup & Merrill Lynch), but also about competing with each other. There is a hint that some of the players are getting ahead of themselves.

Giant Stimulus Plan

There is potential here in Davos to bring like-minded players together for the greater good of the global economy. While the White House debates the merits of the $150 billion stimulus package, there is $1.5 trillion available in the Gulf. That is a serious stimulus package. As respected economist and old Davos hand Fred Bergsten rightly said, this liquidity could lead to a re-coupling of east and west. The investment money from the Gulf, China and Singapore will help avert a recession in the U.S. if, and a big "if" here, the funds are welcomed.

Some anxiety about this was expressed this morning by Mervyn King, now of Standard Chartered Bank, but formerly head of the Bank of England. He said that the funds should agree to a code of conduct for transparency or risk being labelled "irresponsible." That certainly does not set the tone for a collegial Davos-like discussion on closing the gap between those in need of capital and those who hold it right now.

Another Davos veteran, Arif Naqvi, Chief Executive of Abraaj Capital sees this in two stark colors: Black and white. The region is sitting on two commodities in great demand right now: Oil and cash.

Those commodities put the 200 or so players from the Middle East in an enviable position within the halls of the conference center; now if we can only work on the politics so the money can get to work in the right way.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below.

Global footprints of sovereign wealth

noreply@blogger.com (CNN's John Defterios) — Thu, 17 Jan 2008 14:18:00 +0000

This week will likely go down in the financial record books as the one which redefined how the world looks at sovereign wealth funds. It is also part of a bigger geo-economic shift underway, which lends itself to the East-East moniker, meaning the wealth and trade belt from the Middle East to China.

While we have been covering the power of these government funds, where they are seeking to make a mark and the new emerging players within this space, it is only now that these funds are flashing on the global radar.

It is challenging to get hard figures on the total government investment funds under management, but there are a handful of Western banks attempting to do so. Standard Chartered Bank places the value at around $2.2 trillion dollars. I personally think this is off the mark since the Abu Dhabi Investment Authority may have more than half that amount itself

SWFs - Big & Getting Bigger

· $2-3 trillion dollars in assets
· $10-15 trillion dollars by 2015
· Bigger than private equity

(source: Standard Chartered, Morgan Stanley)

More eye-popping clearly is the path ahead. If oil stays in the range of $60-$80 a barrel over the next five years, the amount will surge to $10-$15 trillion. To provide some context, the current sum is already bigger than the global private equity pool, which made all the headlines in the past two years with record buyouts.

Is this a new phenomenon? Certainly not. The Kuwait Investment Authority (KIA) can trace its roots back to 1953; the Abu Dhabi Investment Authority (ADIA) to the mid-1960s. While they traditionally deployed assets in government bonds and currencies, that trend has changed over the past five years and accelerated in the last six months.

Chris Wheeler, banking analyst at Bear Sterns, points to global wealth surveys to illustrate the point that liquidity from record oil prices has to find a home. “A lot of excess funds are being generated which the SWFs are having to invest somewhere and they are finding interesting opportunities in difficult times in the banking sector.” Wheeler, like many others, believes the often talked about recession in the U.S. will lead them to more bargains in other sectors.

This must sound familiar. Saudi Prince Al Waleed bin Talal bought stakes in Citigroup back in 1991 at the equivalent of $2.75 a share. Even at in the mid-twenty range it is today, he is (excuse the cliché) smiling all the way to the bank. He obviously thinks this latest downturn created a similar opportunity and so did others who jumped in this week. They are not traders, but investors who hold their stakes for years, sometimes decades.

Like the financial markets, which create buyers and sellers, this market and story will continue to evolve. One of the newer players on the scene, the Qatar Investment Authority, will re-emerge after its participation in the bid for U.K. supermarket giant J. Sainsbury, and Mubadala of Abu Dhabi has recently put itself on the map with its stake in investment banker The Carlyle Group.

G-8 Wish List

· Invest on commercial grounds
· Respect national transparency rules
· Compete with private sector fairly

(source: OECD, IMF)

As the old and new sovereign funds begin to compete for Western assets, G8 countries are attempting to establish investment standards for all this capital. The U.S. Treasury Department has lobbied to have the O.E.C.D., the Paris based think tank for industrialised nations, and the International Monetary Fund in Washington put forth guidelines for best practices and greater transparency.

That effort gathered momentum a few months ago, but the calls for concrete action have faded away, as the need for capital infusions on Wall Street rose rapidly.

The World Economic Forum in Davos next week will provide a good opportunity not only for us to talk to the Middle Eastern and Far Eastern players making waves in global financial markets, but also to those who are trying to regulate their actions.

What do you think? Email us at mme@cnn.com, or click on "add a comment" below

Quietly Delivering Growth

noreply@blogger.com (CNN's John Defterios) — Thu, 10 Jan 2008 13:20:00 +0000

President George W. Bush’s whistle-stop tour of the Middle East is designed to add urgency to the peace process and at the same time heal some business wounds with allies in the Gulf. Remember the Dubai Ports deal debacle? This visit is long overdue.

With instability between Israel and Palestine, the latter’s economy has ground to a halt. It does not help that there is internal friction within the Palestinian Authority as well. That inability to move has drowned out one of the more positive economic and business stories throughout the region; the performance of Israel’s economy. It has chugged along quite nicely, thank you; at 5 percent in 2006 and 2007 and 4 percent growth is projected this year, with the global credit crunch to blame for the dip.

This to me is quite surprising. While there is no shortage of coverage on the Peace Process and work by the Quartet, we hear very little about how Israel continues to expand. Prior to the bursting of the technology bubble in 2000, we heard a lot about Silicon Wadi. The country re-engineered its highly educated engineers and scientists and re-deployed them into technology. Many of them emigrated from Russia after the fall of communism, enriching the bank of creativity.

That was then, but I was unaware that 400 high tech companies were funded in 2006 raising $1.6 billion dollars. More than 100 Israeli companies are listed on the NASDAQ exchange and there is a special index tracking these stocks. There is no doubt that the capital was coming from Silicon Valley and private equity investors or major technology companies would then want to transfer those companies to the United States.

That is quietly changing, along with the mix of trade and the mix of expertise. Israel is no longer overly dependent on hi-tech. It has added biotech, pharmaceutical and specialist chemical companies to the mix. 46 percent of its trade is now done between Europe and Asia. This only makes sense to leverage its location.

So Israel is quietly performing with the help of its secret weapon, the quiet and competent central bank governor, Stanley Fischer. The name is familiar to those who have covered the Asian financial crisis of 1998. He was at the front of the storm as First Deputy Managing Director, offering the bitter medicine many of the countries did not want to take.

Like many of the other leading economists, the Zambian-born Fischer was educated at the London School of Economics before receiving his doctorate at the Massachusetts Institute of Technology (M.I.T.). During his career he also taught at the other bastion for economics, the University of Chicago.

Which means what for Israel? The country can certainly continue to diversify and look east to capture the growth from India to China. It should try to buffer its exposure to the dollar, which remains on shaky ground. And finally stay the course and pray for peace. The economy is in a good pair of hands and if a deal can be found over the next year, there is a dividend waiting. Fischer, like many others, believes that a peace agreement could add another 1-2 % of growth each year.

Who knows, it could even open the way to Israel’s economic integration into the Middle East, although at this stage, that seems difficult to imagine.

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Wide open space, uneasy riders

noreply@blogger.com (CNN's John Defterios) — Thu, 03 Jan 2008 12:38:00 +0000

The cornfields of Iowa are buried under snow in January. I could almost hear the sound of the ice crunching under the soles of the candidates in search of one last caucus goer in between their shuttle flights to New Hampshire.

I know the beat pretty well having covered presidential campaigns in the past. This election is so unusual since it is, like a Midwestern highway, so wide open. What is happening in Iowa, New Hampshire and the scores of other primaries to follow is far from the desert port city of Jeddah, but it is of keen interest there as well. Like the Iowans being polled on a daily basis, Saudis and others in the Middle East, are seeking change, not at the fringes but at the core.

This was abundantly clear over mezze at one of Jeddah’s favourite Lebanese haunts. I was in the company of four leaders of large trading companies. If you know the Middle East, you know the type. All were between 40 and 50 years old. All are well traveled, especially in the United States and all, after 9/11, sold their properties in that country they were once very fond of. Blame it on visa restrictions, on money transfer hassles and too many questions at passport control.

Ironically, it emerged over lunch; they are all proud owners of a very American icon, a Harley Davidson motorcycle. Each summer as a group and along with their spouses, they take to the road for a two-week journey. But instead of riding down Highway 1 in California, the fabled Route 66 or down the Eastern Seaboard, they are perusing the country lanes of France, the hills of Tuscany and other European bi-ways.

The big macro trends such as the fall in U.S. tourism since 9/11 and the transfer of capital from Wall Street and to London for international initial public offerings are well documented. The micro trends are less documented, such as selling U.S. assets and not sending their children to U.S. universities. Hard investments and soft dialogue through younger generations are long-term assets to build upon.

So while I was expecting to discuss the merits of the colossal Jeddah Economic City, the growth of Saudi Arabia built upon $100 oil and perhaps building a common market in the Gulf, we had a discussion about Iowa, New Hampshire, the candidates, their favourite places in the U.S. and Europe and yes, Harleys.

Wireless Wonder

noreply@blogger.com (CNN's John Defterios) — Thu, 20 Dec 2007 13:47:00 +0000

There is a tendency to think of Global 100 brands when recalling growth leaders in different sectors. That would be a mistake when defining the pacesetters in the mobile phone market.

Vodafone, Orange/France Telecom, AT&T Wireless, T-Mobile and Telefonica spring to mind immediately. How about China Mobile, MTS in Russia, Bharti Airtel in India and Orascom in Egypt?

Like the emerging economies in the region we cover on Marketplace Middle East, there is a track record of better than average growth. Case in point certainly is Orascom.

When Vodafone for example paid $180 billion for Mannesmann in Germany back in 2000, Orascom was buying properties in Pakistan, Iraq and throughout North Africa. In sum founder Naguib Sawiris put Cairo at the centre of his global map and built his network from there. Less competition, faster growth and fewer buyers for the licenses he wanted and eventually landed.

The result: Sawiris is confident he can cross the 100 million-customer mark in 2008. He is not far off now with 90 million when adding his most recent purchases in Italy (Wind) and Greece (Tim Hellas). Those two countries are part of his Greater Mediterranean strategy.

While his forays into high growth markets are well documented, his next chess moves are not. Sawiris shared some of his insights this week for the time afforded in our television programme.

He is not planning to exit the market: “We’re building a war chest …what we are trying to find now is a target we can acquire without a price war.”

He is eventually open to a global partner like his brother Nassef who sold Orascom Cement to the French: “If I ever do a deal like that, I would like more than 11 percent for sure and I would like to have a say in the company.”

He wants to go back into India: “We’d go back indirectly through someone who is already there but we don’t believe in any new entries there.”

He has been frustrated by China's lack of openness: “We’ve been shouting and screaming and saying that it’s not fair…so we’re trying to find a way to get into China and we think we have found a way.”

He believes newcomers such as Zain and MTN are willing to pay too much: “All our neighbours are full of cash, driving prices up.”

And there some other nuggets that are trademark Sawiris, someone who is not afraid to speak his mind and court controversy.

In a global market that is getting more, not less competitive, it is difficult for him to secure high growth opportunities. Vietnam and Cambodia hold great economic promise, but from a mobile phone market perspective are too saturated already.

North Korea has the DNA market traits that he likes. In his words, they seem “peace-loving” and the dismantling of their “nuclear things” is a positive. Negotiations for that market are underway.

Then what. After building an estimated net worth of $10 billion, why fight the tide of competition? His answer, “Telecom is in my blood. If I ever do something, I will remain in telecom.”

And remain controversial. He is known within Egyptian social circles for his round-the-clock energy and more. Beyond speaking his mind in business, he has other thoughts about trends in the Muslim world. Most recently he said that the growing ranks of women wearing the hijab or veil in the streets of Cairo gave him “the impression of being in Iran. I feel like a foreigner.”

The statement prompted a fatwa from a conservative sheikh to boycott his company.

One should not expect an impact on Orascom nor on the free-speaking billionaire.

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Third time not a charm?

noreply@blogger.com (CNN's John Defterios) — Thu, 13 Dec 2007 08:48:00 +0000

The great big marble building on 20th Street and Constitution Avenue in Washington has served as a beacon of financial stability. When decisions emerge from the Federal Reserve’s Board of Governors meeting or from a Capitol Hill testimony the world watches and financial markets respond.

They did so this week with the quarter point cut in short and long term interest rates. It was the third move by the Fed in recent months, but the response was not positive either in U.S. financial markets or throughout the Middle East. In order to pack a “one-two punch” central banks stepped up with a $100 billion transatlantic coordinated effort to provide liquidity to commercial banks.

In the United Arab Emirates, the central bank followed the lead of the Federal Reserve and matched its short-term rate to the U.S. at 4.25 percent. Great, this means the growth machine in the Gulf continues? Not exactly. The central bank cut rates because of the link or peg to the U.S. dollar, which will put more pressure on inflation of better than 9 percent in the Emirates. This week inflation in Saudi Arabia hit a ten-year high, crossing 5 percent. Both are mild compared to Qatar, which is witnessing inflation in excess of 14 percent. A recent trip to Doha tells the story. Revenues from the gigantic North Field natural gas deposits are fuelling a sizable expansion in the emirate of less than a million people.

So as we wind down 2007 and prepare for our holiday of choice, what can we expect from the Federal Reserve, its counterparts in the Middle East and from emerging markets in 2008?

As we have witnessed in the past five years, the U.S. Central Bank is prepared to move, hence this Fed statement accompanying Tuesday’s decision: “Economic growth is slowing reflecting the intensification of the housing correction and some softening in business and consumer spending.” The door is certainly ajar for more action.

Last week on Marketplace Middle East we reported that the five remaining members of the Gulf Cooperation Council (Kuwait already de-pegged) were not prepared to remove their collective pegs to the U.S. currency. 2008 may provide a fresh impetus to rethink this strategy if -- and a big IF here -- regional and global growth outside the U.S. continues at this pace.

At its spring meetings in Washington, the International Monetary Fund predicted that global growth could tick along at a rate of 5 percent this year and next after posting growth of 5.4 percent in 2006. The fuel has been coming from India, China and the Middle East. The two emerging giants are growing between 8-10 percent and regional growth of 7 percent in the Middle East is nothing to sneeze at.

This will be a phenomenal test for the new East-East axis for trade, driving growth from the Middle East to East Asia. While Citigroup brought in Vikram Pandit as CEO, Wall Street was bracing for the next round of write-offs due to the credit crunch. On the other side of the mood barometer, the CEO of General Electric, Jeffrey Immelt, is pointing to strong global growth to drive 2008 profits, while saying he would not put a “happy face” on any division that is overly dependent on the U.S.

Which means what for our friends in the Middle East? Federal Reserve Chairman Ben Bernanke and his team in that great marble building probably have not finished cutting interest rates, and central bankers in the region may need to cut their ties to the U.S. dollar to help ward off inflation and to align with economies they are more in sync with.

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